Rise in ‘national savings’ rate and the capital market

[Naveed Yaseen]

By Shahid A. Razzak
IN the wake of a macroeconomic stabilisation plan — restricting or replacing government borrowings from the State Bank of Pakistan (SBP) with non-bank debt — the profit rates of National Saving Schemes (NSS) have been raised from December 1, 2008.

The rates of return on Special Savings Certificates has been increased from 13 per cent per annum to 14.53 per cent, on Regular Income Certificates from 13.3 per cent to 15 per cent, on Pensioners’ Benefit Account and Bahbood Savings Certificates from 15 per cent to 16.8 per cent and on Savings Accounts from nine per cent to 10 per cent.

The institutional investment in the NSS was banned in March 2003, when the government suffered massive losses while paying high rates of returns on bulky investments to the institutions. The ban was imposed in order to develop the domestic debt market and subsequently the corporate debt market.

However, the government allowed institutional investments, barring banks, insurance companies and non-bank financial institutions, in the NSS after bringing its rate of return at par with the open market from October 1, 2006.

This decision seems to be quite contradictory, in the given times, as the high rate of returns with no chances of losses, the saving schemes are serving as a safety cushion for institutions which can make unlimited investment in them. This trend would be lethal to the national exchequer.

The excessive government borrowings during the last one and half years from the State Bank is a source of concern, which is the most inflationary in nature as it contributes to reserve money growth and in the presence of double-digit inflation, the central bank would have to keep interest rates high for a longer duration.

The government plans to raise Rs150 billion through NSS during this fiscal year as against the Rs81 billion generated last year.

Unfortunately, instead of raising funds from Pakistan Investment Bonds (PIB) issues, the government has made investment in NSS more attractive.

Although it would attract large investments in the NSS, it is going to hurt the already almost non-existent domestic debt market and raise interest rate risk for the government. If the dependence on SBP borrowings were to be reduced by issuance of government bonds, it would also have acted as a corporate debt benchmark.

The decision to increase the NSS rates could have far-reaching implications for capital market, money market, banking industry, investors’ behaviour and debt servicing.

In the recent past, banking industry witnessed a brisk growth in assets, the profitability was at an all-time high and the deposits of the commercial and foreign banks were surging. The gap between what the banks charged on loans versus what they offered on deposits was unbelievable. With consumerism reaching new heights, the banks are in blues.

Capitalisation in the local equities market and along with it the KSE- index surged and reached unprecedented heights.

Those investors who considered themselves savvy enough not to be tempted by the alarmingly high performing capital market went in for diversification and steady, rational growth and placed their investment in units of various mutual funds to earn a realistic gain but were given a hefty blow by the Securities and Exchange Commission of Pakistan’s (SECP) recent directives.

It now seems that the recent shift of the government policy to invest (non-bank corporations) in the NSS will badly hit the public-private partnership for infrastructure projects. This will squeeze the already wrenched capital market, mutual funds and asset management companies substantially.

After the recent increase in the NSS rates, the banks would indulge in a war of deposit mobilisation and that ultimately will increase return to the depositors.

Many domestic banks have already increased their deposit rates and this is going to hurt mutual funds and asset management companies that are already facing the crunch from the equity market slide.

In order to come out from the current financial crisis and sustain economic growth, the country desperately needs to considerably improve its infrastructure by attracting significant private sector participation which will be difficult without long-term debt markets.

This calls for predictability in borrowings from banking system and raising non-bank borrowings through PIBs rather than the NSS.

http://www.dawn.com/2008/12/08/ebr15.htm